Freeport says Grasberg stake to fall to 29% – shares dumped

Grasberg accounts for more than 25% of Freeport's copper output. (Image: NASA.)

Shares in Freeport McMoRan Inc (NYSE:FCX), the world's second largest copper producer, were clobbered on Wednesday as investors ignored the release of third quarter results that handily beat Wall Street estimates to focus on the company's ongoing negotiations with Indonesia over the future of its Grasberg mine.

After initial gains, Freeport quickly turned lower losing as much 4.9% by mid day in heavy trade of more than 18m shares. Freeport is worth $21.1 billion on the New York Stock Exchange, just holding onto a double-digit percentage gain for the year.

"While we are encouraged by Freeport's operational performance, progress (or lack thereof) in the company's ongoing negotiations with the government of Indonesia is clearly critical to the FCX investment case"

Freeport recorded sales of 932 million pounds (422,000 tonnes) of copper and 355,000 ounces of gold, below its already lowered forecast made in July. Freeport maintained its 2017 annual sales forecast of 3.7 billion pounds of copper (1.68m tonnes) and 1.6 million ounces of gold (all of it from Grasberg), a target the company has adjusted downward on two occasions this year.

Freeport remains at loggerheads with the Indonesian government over selling a majority stake in its Grasberg mine in the remote Papua province, responsible for more than a quarter of the firm's overall copper production.

Freeport agreed a framework with Jakarta to sell 51% of its Indonesian subsidiary PT-FI at the end of August and in a statement accompanying the results Richard Adkerson, President and CEO said "the parties have a mutual objective of completing the required documentation during 2017":

“We are encouraged by continued progress in our active negotiations with the Indonesian government regarding our long-term operating rights in Indonesia and remain focused on managing our long-term business for the benefit of shareholders."

Reuters reports that during a conference call Freeport said its stake in PT-FI "would drop first to 49% and then to 29%" under the deal:

"While our interest in the participation in Grasberg would be reduced, we would be receiving cash from that interest, which would reduce our exposure to Indonesia," Adkerson said. "There's positive and negatives to that."

Freeport said on Wednesday it expects $1.5 billion in capital spending this year, with $700m of the total allocated to Grasberg. Apart from building smelters in the Asian nation, Freeport has committed to spending $1 billion per year for the next five years to move operations underground at Grasberg with block-cave mining set to commence in early 2019.

Freeport has been mining at Grasberg since the early 1970s and currently owns just over 90% of PT-FI. Freeport has been in negotiations to sell down its stake for the better part of a decade, but talks have repeatedly broken down over valuation.

Last year, Freeport offered a 10.6% interest in PT-FI that valued Grasberg at $16.2 billion. Jakarta’s counter offer was $630 million. The government is arguing that Grasberg's reserves belong to the state and not the mine operator. Freeport estimates Grasberg's underground reserves currently being developed at 11.8m tonnes of copper and 24m ounces of gold.

"Negotiations in Indonesia matter more than anything else for now," Jefferies and Co analyst Christopher LaFemina said in a note to clients quoted by Reuters:

"While we are encouraged by Freeport's operational performance, progress (or lack thereof) in the company's ongoing negotiations with the government of Indonesia is clearly critical to the FCX investment case."